With technology that targets TV ads by neighborhood and even household, Seth Haberman is rescuing the 30-second spot from certain oblivion.

By Paul Keegan

November 1, 2004

(Business 2.0) – In a darkened conference room, shades drawn, a group of executives from the venerable New York advertising agency Foote Cone & Belding are watching a TV spot for Bermuda tourism. With its cheesy music and generic shots of kids splashing around in the water ("This is really cool!"), the ad is precisely the kind of banal irritation that millions of viewers would never think twice about banishing to oblivion with a digital recorder—the device now sending shock waves across the $60 billion television advertising industry and fueling speculation that the demise of the mass-market 30-second TV ad is finally at hand.

Not that the baseball-cap-and-flip-flop-wearing creative types gathered here are eager to publicly discuss this or the many other troubling developments besetting their industry. Ad agencies are being squeezed for profits by their parent companies. Clients are paying them less to offset the higher prices broadcast networks are charging for delivering smaller audiences. The Internet continues to siphon off business—Web advertising jumped by 20 percent last year, to $7.2 billion, while spending for TV ads remained flat. And now couch potatoes across America are zapping their little masterpieces with impunity. TiVo-like digital video recorders, currently in 6 percent of U.S. households, are expected to reach 33 percent penetration in the next four years now that cable companies are building them into their digital set-top boxes.

What nobody here wants to admit—what one veteran adman privately calls the elephant in the room—is that all these problems stem from a single unpleasant fact: Madison Avenue is stuck in a 1950s time warp. While the era of mass media has long since departed—just glance at the hundreds of cable channels and thousands of special-interest magazines if you require proof—most ad agencies still operate the same way they did during the Eisenhower administration: Toss a single TV spot at millions of random viewers in the hope that a small fraction might be interested in that new Chevrolet or life insurance from Prudential. Compared with the intricate marketing science available to advertisers today, the 30-second TV ad remains an astoundingly dumb, blunt instrument.

Sitting at the head of the conference table is a quiet, curly-haired 44-year-old man in sneakers, rumpled shirt, and khakis who wonders why this has to be so. Seth Haberman has already revolutionized the media business once by inventing the technology that allowed the editing of film on a computer instead of strips of celluloid—an achievement that won him an Academy Award in 1987. Five years ago he started a New York company called Visible World to invent something even more earthshaking: a video production and distribution technology that would give advertisers the staggering reach of television but add the precise targeting ability of direct mail and the instant-updating capacity of the Internet. He hoped to invent, in other words, the holy grail of advertising.

The Bermuda spot ends, and a series of drop-down menus appears on the screen requesting information that Haberman believes will solve the biggest problem with TV ads—their lack of relevance to the viewer. Haberman directs a colleague to insert data into the menus, specifying a target audience—in this case, young singles living in Manhattan's upper west side. Now the ad plays again. The squealing tykes and their parents disappear, replaced by attractive young people frolicking on a tropical island—scuba diving, smooching in the pool, riding mopeds. A tagline at the end suggests buying a ticket from Planetarium Travel on W. 81st St. and flying from LaGuardia for $446 before the sale ends in nine days. (You can see how it works for yourself at www.business2.com/marketing.)

Lynne Seid, the president of FCB, turns in her swivel chair and gives her team a wide-eyed look. The demo is primitive, Haberman concedes, but the possibilities are endless. Instead of making a single ad, the agency can now create its 30-second stories as a sequence of swappable components using Visible World software. The file is then sent to servers, already installed at Comcast's cable centers, which instantly assemble hundreds or even thousands of different versions of the ad and send them to particular groups of viewers. The ads can be updated or modified automatically, just like a website. "In the winter, an airline ad could say, 'It's 52 degrees warmer in Miami today,'" Haberman tells the group. "Or an ad for a limited-edition Volkswagen Beetle could say there are only 392 cars left, creating a sense of urgency."

The tools are ready now, he says, and blue-chip advertisers like Bank of America, Ford, and United Airlines have already used them to target campaigns at precise geographic areas, reaching a potential audience of 25 million through Comcast and consortiums of other cable operators that license Haberman's technology. In an early test in Los Angeles just before Mother's Day in 2002, 1-800-Flowers says it doubled its orders when elaborate floral arrangements costing as much as $493 were pitched to viewers in upper-income areas while $20 budget bouquets were hawked to poorer sections of town.

Comcast says it can direct ads to narrow zones of 1,000 to 20,000 homes in a growing number of cities, including Boston, Chicago, Dallas, Detroit, Miami, and Philadelphia. But to Haberman, that's just the beginning. Within the next two years, he hopes to offer advertisers the ultimate prize: targeting ads to individual households based on criteria such as age, marital status, favorite leisure activities, preferred airlines, and credit cards—though, understandably, this very notion raises delicate privacy issues that have yet to be negotiated.

Exciting as Haberman's technology is, broad deployment will require some fundamental shifts in the way two enormous industries—advertising and television—do business. And even then, it remains to be seen whether targeted TV ads will be compelling enough to make people take their thumbs off the fast-forward button. But a growing number of Madison Avenue executives have emerged from Haberman's demo saying that their world has just changed forever. "We were all totally blown away," Seid says after the meeting. "This is the beginning of the era that everybody's been talking about since the Internet became viable—when one-to-one marketing invades major media like TV. It's a seminal moment."

Visible World's offices are tucked into a nondescript industrial building near Manhattan's West Side Highway. The company has 28 employees and occupies one floor that seems mostly deserted. Annual revenue is less than $10 million, and Visible World has yet to turn a profit. "I didn't think it would take so long to catch on," Haberman says, sitting in his small office. "I thought it was so self-evident. When you look at it, you get it."

The idea behind Visible World was born in the early 1980s, when Haberman was helping to build Prodigy, the first online service for consumers. A 1981 graduate of Columbia with a bachelor's in physics and computer science, he used his training in artificial intelligence to automate the creation of editorial content—searching Associated Press reports for baseball scores, for example—and wondered why the same techniques couldn't be applied to advertising. Why couldn't Campbell's Soup show ads of somebody snuggling up to a bowl of hot soup the moment snow started falling?

But he didn't begin to explore the idea seriously until 1999, by which time he was a leading expert in computerized video editing; his nonlinear editing technology had become the industry standard in software made by big firms like Adobe, Avid Technologies, and Microsoft. Haberman suddenly found himself with time on his hands when he and his two partners sold their company, Montage Group, to Pinnacle Systems of Mountain View, Calif., for $3.7 million. Since the Internet couldn't yet deliver moving pictures with any reliability, he ignored the prevailing dotcom mania and set about trying to breathe new life into the old-fashioned TV commercial. "I didn't know anything about advertising or cable," he admits. So he bought books with titles like Modern Cable Television Technology and underlined passages as though he were cramming for a big exam.

It took just one meeting with an advertising agency, however, to realize that his biggest obstacles were not technological but cultural and psychological. "Someone said, 'Oh, that's database marketing,'" Haberman recalls, laughing. "I didn't realize there's a stratification in the world of advertising between direct-marketing people and general advertisers that's greater than serfs and knights. Database marketers are really looked down upon." So he changed a few words in his business plan, replacing phrases like "direct marketing" with "customized creative expressions," and agencies suddenly became enthused.

With encouragement from major players like the late Jay Chiat of TBWA\Chiat\Day, by 2000 Haberman had raised $20 million from a group of investors that included Grey Global Group, Reuters Venture Capital, and WPP. But then the recession of 2001 knocked the advertising industry for a loop. As ad spending dropped and layoffs became widespread, the industry retrenched and nobody was in the mood to hear about a crazy new idea challenging the very concept of the all-purpose, mass-market TV ad. "When people have all this cultural muscle memory, it's very hard to change it," Haberman says.

But as the advertising industry began emerging from its recession last year, it was hard to ignore how much the media world had changed. While TV remains the best way to reach the masses—the average American spends four hours a day in front of the tube but less than 30 minutes online—those audiences have become so fragmented that it's difficult for advertisers to spend enormous sums without knowing more precisely who's seeing their spots. American Express, for instance, has reduced its TV ad budget by almost two-thirds since 1994, while investing more heavily in Web-oriented campaigns like the recent "Superman" series, starring Jerry Seinfeld. In September, Mitsubishi Motors canceled its entire $120 million prime-time broadcast network budget in favor of more targeted media like cable channels, magazines, and the Internet.

Recognizing this trend—and noticing the success of trials like the 1-800-Flowers campaign—Comcast thought that becoming a leader in targeted TV advertising might increase the flow of advertising dollars, which today represents only about 6 percent of its revenue. That was Haberman's big break. By signing a two-year multimillion-dollar contract with the nation's largest cable provider, with 21 million subscribers, Visible World suddenly became the leading tech vendor for targeted TV advertising, well ahead of competitors like OpenTV of San Francisco, Invidi of Princeton, N.J., and Navic of Needham, Mass.

About the same time, Visible World got another infusion of cash when several of its original investors—and new ones including Comcast and a former advertising executive named Bill Katz—chipped in a total of $8 million. Katz became the company's chief evangelist on Madison Avenue when he also signed on as an adviser to Visible World earlier this year, shortly after leaving his post as chief executive of BBDO New York.

In August, Katz invited June Blocklin of Young & Rubicam to drop by. Her firm had recently finished a major project for AT&T that required the agency to manually create dozens of versions of a TV spot reflecting the wide variety of rates the company was offering across the country. The process was long, arduous—and, it turns out, unnecessary. "When I saw the demo," Blocklin says, "my reaction was, 'Wow, I coulda had a V-8!'" Haberman's concept, so obvious to him five years ago, was finally catching on.

Now that foreheads are being slapped from one end of Madison Avenue to the other, Haberman finds himself navigating the byzantine culture of another multibillion-dollar industry—television. But unlike the ad business, the world of TV is already going through massive upheavals as the nation's biggest media and technology companies battle to control the various rivers of entertainment—soon to be a major flood—flowing into America's living rooms.

Regardless of what the electronic hearth of the future ultimately looks like, whether it's based on set-top boxes, PCs, videogame consoles, or another yet-to-be-invented gadget, Haberman is hedging his bets by saying that his technology is "channel-agnostic" and works not only through cable wires but also over broadcast networks, satellites, and broadband Internet connections.

Broadcasting appears to be a tough sell because, without a pipe into the living room, the networks can't target ads geographically or by household. But Visible World recently cut a licensing deal with Fox Broadcasting that allows ads to be customized in many other ways. The spots can change instantly based on the Dow Jones Industrial Average, a competitor's sale, or any other factor. Dell, for example, could program its ads to adjust automatically depending on what products are selling on its website and gauge each ad's effectiveness by flashing special toll-free phone numbers on the screen. Under the terms of the contract, advertisers pay Visible World each time an ad is run using its servers.

But the Fox deal illustrates the catch-22 that Haberman finds himself in as he pushes for wide deployment of his technology. Cable companies can target ads all the way down to the household level, but they have a very limited inventory of ad space to sell—only about 90 seconds per hour. The networks have the content that attracts advertisers and lots of airtime to hawk—about 10 minutes per hour—but they can't offer geographic or household targeting. Clearly, the two sides need each other. Haberman can only do his best to convince them that giving advertisers the ability to target their ads will be in everybody's best interests.

It would appear that cable companies have the advantage at this early stage, since they can offer ad targeting right now. But Comcast has a catch-22 of its own. Since the company derives roughly 94 percent of its revenue from subscribers, it has little choice but to keep them happy by offering TiVo-like recorders in their new set-top boxes. On the other hand, now that the subscriber markets are saturated, the company needs to bring in more ad revenue to keep growing. Worse, that limited inventory of 90 seconds per hour is considered something of a ghetto—populated as it is by Joe's Pizza and 1-800-RIP-OFF! ambulance-chasing lawyers—that typically scares away national advertisers.

So why would an advertiser buy an ad in TV's shadier precincts from a cable company that's encouraging its subscribers to skip over the ad anyway? The answer, Comcast hopes, is the latest advertising buzzword: relevance. If ads are made more relevant, the theory goes, viewers will put down the remote. The chance to target ads will attract a classier group of clients and gentrify the neighborhood, Comcast believes. Hence, its ambitious goal to double its ad revenue to $2 billion by 2007.

One advertiser who buys this argument is Jerry Dow, head of worldwide advertising for United Airlines. In March he became so excited during Haberman's demo that he interrupted the meeting to call his ad agency, Fallon Worldwide. At the time, Fallon was in the final stages of planning a Chicago-area campaign to introduce Ted, United's new friendlier, folksier airline. Within a month, people in Schaumburg, Ill., began seeing arch, ironic ads for Ted's flights to Las Vegas that featured groovy lounge music accompanying words on a yellow screen: "Viva Las Schaumburg. Doesn't quite have the same ring to it." Residents of Arlington Heights, Wilmington, and 15 other Chicago suburbs got their own versions.

There's no way to measure the effectiveness of these particular ads, Dow says, but he considers the experiment a smart investment in learning how to use a new technology that may soon be indispensable. "If we appear next to a pizza ad, so be it," he says. "It feels like the early days of the Internet. You've got this new tool, and you're not completely sure where it's gonna go. But you know that you need to pay attention to it because it's going to be big."

The promise of relevance is expected to become even more critical during the next several years as cable operators begin asking subscribers to upgrade to video-on-demand as another key source of revenue. Though the technology is marketed for its convenience—instead of recording Everybody Loves Raymond, you can just order it whenever you want—many viewers will no doubt enjoy the ability to fast-forward through the ads.

Trying to put a positive spin on this inevitable next step, cable operators argue that it's a rich opportunity for advertisers to "move out of the 30-second world," in the words of Hank Oster, senior vice president of Comcast Spotlight, the firm's ad sales division. "If you're watching a football game, you might get a prompt to see the all-new Chevy Suburban. Then you could go to a special GM channel and watch the ad anytime."

Hmmm. No wonder Madison Avenue prefers to pretend it's still the 1950s, when our choice was to sit through the ads—or, heaven forbid, get up off the couch and change the channel. But Haberman believes that just as technology is creating huge problems for TV advertisers, it can also provide a solution. By far the best way to get us to watch ads, he believes, is to target each one of us with a customized spot of our own.

Back in the Visible World conference room, the demo is nearly over and FCB staffers want to know when companies will be able to direct ads to specific households. The Bermuda spot, for example, incorporated data about the average age of children in the household as well as favorite TV shows and recreational activities like scuba diving, tennis, and golf. "Technically, we can do it today," Haberman says. "We're starting trials this fall, and it should be widely available in 18 to 24 months."

The executives, art directors, and media buyers look at one another and nod, impressed. Somebody says it reminds him of the futuristic film Minority Report, in which Tom Cruise walks past electronic billboards that call out his name and offer a dizzying assortment of products tailored to his tastes.

Such speculation makes Oster, the Comcast Spotlight executive, extremely nervous. "The fact that Seth says that in 18 months we can go to the household set-top box and address 'Bob' by name doesn't mean it's going to happen," he says. "Privacy laws are very specific—we are not able to take that list of subscribers and target them by name. We're still at least 36 months from being able to do that, and I'm not even saying that the privacy issues will be resolved in 36 months."

Forrester analyst Eric Schmitt is even more pessimistic, calling Haberman's timetable "science fiction"—primarily because he believes that consumers will object. "Ninety percent of the revenue from cable companies comes from subscribers, and they're not about to jeopardize that by selling ads to individual households to squeeze a few more percentage points of ad revenue."

But Haberman insists that privacy concerns can be assuaged in a variety of ways. Subscribers might voluntarily provide personal information through their set-top boxes. Or cable companies will simply deliver ads to particular subscribers without revealing their identities, functioning like the post office delivering a direct-mail solicitation from Sony based on a registration card you filled out—or on the reams of information collected on each of us by Acxiom, Experian, and other giant data-mining companies routinely used by direct marketers. "Sony says to the cable operator, 'I want you to deliver a message to this person, and you make sure it gets into their mailbox,'" Haberman says. "That's the best way to think about how cable works."

Several of Visible World's competitors are taking a somewhat different approach, exploring interactive advertising as the best way to pitch consumers directly while also learning about their habits and tastes. That's the promise of the Internet, of course, but Haberman is convinced that advertising is like any other form of storytelling and really works only when the audience is in a passive, receptive state. "The reason we can cry over a play or movie or a story is because we're willing to sublimate our own narrow beliefs for the reality that someone else is creating," he says. "The minute I start saying, 'I want him to do this,' that reality disappears."

Even if Haberman is wrong and interactive TV eventually becomes the norm, he's in no mood to wait around. It's already taken five years for him to convince the advertising and television industries of the power of his idea, he says, so he's ready to sell Visible World to the highest bidder or go public as soon as targeted TV advertising takes off, with Visible World one of the leading technology providers. "Even if we only get 10 percent of the new business and make our nickel," he says, "we're a huge company."

The FCB meeting ends, and Haberman shakes hands with Seid and her staffers at the elevators. She's eager to get back to the office and start planning how to use the new technology. "It's the future of advertising," she says. Exactly when that future arrives will depend on how long it takes Haberman to drag the rest of Madison Avenue—kicking and screaming, if necessary—into the information age.

The Competition: Three That Are Taking Another Approach

Visible World isn't the only company gunning to create targeted TV advertising. But its biggest rivals are bypassing cable servers to focus on software for the set-top box.